Richard Bernstein Tactical Series, American Industrial Renaissance®, 2019-1
A variety of factors are driving the manufacturing renaissance in the United States. Slower growth in hourly compensation compared to some global competitors and lower natural gas
and electricity prices are leading the U.S. to become one of the lowest-cost countries for manufacturing in the developed world, according to Boston Consulting Group (BCG). We
believe the U.S. will have a competitive advantage over other countries, which could potentially allow U.S. industrial and manufacturing companies to gain market share.
For many decades, American companies sent their
manufacturing work overseas. But today, in a trend
known as “reshoring,” many companies are bringing
their manufacturing back to the U.S. The ISM
Manufacturing Index hit 52.8 in April, which indicates
growth in manufacturing for the 32nd consecutive
month. Thirteen out of 18 manufacturing industries
reported growth. The April 2019 ISM Employment Index
was at 52.4%, which indicates a growth in employment
in April for the 31st consecutive month. Despite fears of
trade wars and workforce shortages, U.S. manufacturers
have continued hiring. In the last 12 months prior to
February 2019, the manufacturing sector added an
average of 22,000 jobs per month. This gain in
manufacturing jobs is the result of both new reshoring
and Foreign Direct Investment (FDI) by foreign
companies into our manufacturing sector. In addition,
for the seventh year in a row, business leaders around
the world have chosen the U.S. as the number one place
to invest (see Chart 1). According to an A.T. Kearney
survey of corporate executives, this is likely a reflection
of its large domestic market, continued economic
expansion, competitive tax rates, and technological and
Richard Bernstein Advisors believes the following four factors point to the U.S. gaining industrial market
Wages and Productivity
The U.S. manufacturing sector has benefited from a
talented workforce, advanced technology, and pro-business policies. Although labor
costs in the U.S. are significantly higher than other countries, the productivity levels
found in the U.S. make up for this difference and have made the U.S. an attractive
location for manufacturing investment. The wage gap in the U.S. in comparison to other
countries has started to drop and is anticipated to continue to drop further as the cost
of industrial robots falls. Disruptive technologies such as additive manufacturing, 3Dprinting,
advanced robotics, and the utilization of the Internet of Things and Big Data
are revolutionizing the U.S. manufacturing sector. This advancement in technology has
not only increased levels of productivity in the U.S., but has also made the U.S. one of
the most attractive locations for high-technology manufacturing firms.1
Quality Control, Transportation Costs and Decreased Time to Market
Some companies that have already begun to reshore have cited the benefits in having
designers, engineers and sales people at the same facility rather than oceans apart.2 The
cost of shipping parts around the world and the associated time to market can create
hidden costs that may negatively impact both profit margins and market share.
In 2018, the number of companies reporting new reshoring and FDI was at the highest
level in history, up approximately 38% from 2017. The combined reshoring and related
FDI announcements totaled over 145,000 jobs, the second highest annual rate in
history. The total number of manufacturing jobs brought to the U.S. from offshore is
estimated to be over 757,000 since the manufacturing employment low of 2010.3
2 Source: A.T. Kearney
3 3Reshoring initiative
Natural gas had long been the
second-most prevalent fuel for electricity generation
behind coal. According to the U.S. Energy Information
Administration, natural gas-fired generation first
surpassed coal generation on a monthly basis in April
2015. Natural gas-fired generation has surpassed coalfired
generation in most months since then. In 2018,
natural gas had the largest percentage contribution to
electricity generation at 35.1%, coal contributed 27.4%
and nuclear rounded out the top 3 at 19.3%.
The Potential Advantage for Small Banks
Large U.S. banks have strayed from traditional lending
sources of income toward more risky sources of return,
for example, investing in corporate bonds rather than
making corporate loans, according to Richard Bernstein
RBA believes it may be prudent to avoid the larger banks
until they return to their traditional income-oriented
roots. In contrast, smaller U.S. banks generally have
strengthening balance sheets and continue to aid U.S.
capital formation. Admittedly, traditional banking
typically has lower profitability ratios, but smaller U.S.
banks do not need massive trading infrastructures and
unnecessary global risk-taking to be profitable. Manufacturing is a capital-intensive business that requires equipment, tooling and raw materials. For the manufacturing renaissance
to come to fruition, RBA believes manufacturers will turn to smaller banks for the financing required to hire more workers, buy new equipment and aggressively market themselves.
|The Richard Bernstein
Advisors Tactical Series,
Renaissance®, is a unit
investment trust (UIT) which
seeks above-average capital
appreciation by investing in
small- and mid-cap U.S.
companies in the industrial
and community banking
sectors. The stocks are selected
for the trust by Richard
Bernstein Advisors using a
comprehensive process and held
for approximately two years.
There is no assurance the
objective of the trust will be met.
| Not FDIC Insured Not Bank Guaranteed May Lose Value
You should consider the portfolio's investment objectives, risks, and
charges and expenses carefully before investing. Contact your financial advisor
or call First Trust Portfolios, L.P. at 1.800.621.1675 to request a prospectus,
which contains this and other information about the portfolio. Read it carefully
before you invest.
An investment in this unmanaged unit investment trust should be made with an understanding of the risks involved with owning common stocks, such as an economic recession and the possible deterioration of either the financial condition of the issuers of the equity securities or the general condition of the stock market.
You should be aware that the portfolio is concentrated in stocks in the industrials sector making it subject to additional risks, including limited diversification. The companies engaged in the industrials sector are subject to certain risks, including a deterioration in the general state of the economy, intense competition, domestic and international politics, excess capacity and changing spending trends.
The trust also invests in companies in the financials sector. The companies
engaged in the financials sector are subject to the adverse effects of
volatile interest rates, economic recession, decreases in the availability of
capital, increased competition from new entrants in the field, and
potential increased regulation.
An investment in a portfolio containing small-cap and mid-cap companies
is subject to additional risks, as the share prices of small-cap companies
and certain mid-cap companies are often more volatile than those of
larger companies due to several factors, including limited trading
volumes, products, financial resources, management inexperience and less
publicly available information.
This UIT is a buy and hold strategy and investors should consider their ability to hold the trust until maturity. There may be tax consequences unless units are purchased in an IRA or other qualified plan.
The value of the securities held by the trust may be subject to steep declines or increased volatility due to changes in performance or perception of the issuers.
As the use of Internet technology has become more prevalent in
the course of business, the trust has become more susceptible to
potential operational risks through breaches in cyber security.